Sarasin - How to stay responsible in a digital world
26 May 2021
While technology is key to driving economic growth, there are a number of ESG factors that responsible investors should be aware of. Sarasin’s analysts Josh Sambrook-Smith and Kwai San Wong take us through these issues.
Technological creativity is one of the key ingredients of economic growth. It has provided what economists refer to as ‘a free lunch’: an increase in output that is greater than the increase in cost and effort required to bring it about. But what about the ESG risks?
The economic growth that accompanies this technological innovation brings with it a host of positives: rising living standards, better health, nutrition, clothing, and the reduction of toil, famine and disease. Yet as a society adopts novel innovations and technologies, there is a cost to bear in the short run in order to reap the benefits in the long run.
The industrial revolution sets a good precedent for this dynamic. After 1815, occupations such as handloom weaving and frame knitting were rapidly wiped out by factories. However, at the same time, this technological change increased demand for and created other types of jobs – jobs that involved supervising or operating new technologies.
What are the most important ESG concerns today?
How does this apply to the current wave of innovation in cloud computing, AI and digital media? While digitalisation is one of the five investment themes we see as having the most potential for growth, as an asset manager with stewardship at it core, we pay close attention to the interaction between ESG and technology.
We have identified a number of issues specific to technology that responsible investors need to be aware of:
As one of our five themes, we believe that automation has the power to change lives for the better. However, technological advances can also result in labour market inequality – with the most skilled and highly educated benefitting and the least skilled seeing their work devalued. This has the potential to drive social unrest.
To participate in our increasingly digitised world, it is increasingly required that people share their data. This raises a number of concerns such as the potential for fraud and the extent to which usage of public data threatens civil liberties.
Algorithms can reflect the underlying biases of their creators. These biases can have serious repercussions, from reinforcing one group’s prejudices to software failing to recognise ethnic minorities (as happened with Microsoft’s self-driving car).
It is possible to become addicted to the internet – and it’s no surprise, as the amount of data we provide when using the web supplies businesses with information about how to get us to engage. Digital addiction is increasingly recognised by health experts as damaging.
Radio waves, such as those that emanate from a telecom tower, are not as dangerous as other forms of radiation, but they can still have effects on humans. For example, standing next to an antenna will heat the skin. While there is scant evidence that 2G and 3G technologies cause harm, there is as yet little data on 4G and 5G, which rely on higher frequencies.
An increasing number of technology companies are listing with dual share classes, where the founders will retain most of the voting power. This has important repercussions for investors given the lower level of control they can exert over the business. Typically, we expect to have voting rights, but with a dual class share structure, minority shareholders’ votes barely matter.
Platform companies connect the real world, but they also bring real world problems onto their platforms. Policies governing online conduct, content moderation, speech and so on are hugely important for platforms of any size. However as online communities coalesce around a handful of very large social platforms, the issues arising on these platforms start to collide with cultural norms, institutions and value systems, meaning that getting their governance right becomes crucial.
Network effect tends to make large platforms bigger. When a corporation becomes very big, there is a risk that it acquires too much market power, creating the potential for abuse and negative impacts on the economy. This isn’t unique to technology, but has become particularly relevant in the age of the so-called FAANG stocks.
It has been estimated that up to $600bn is lost to tax-havens each year in the US and western Europe, significantly reducing the resources available to the state so that it can provide public goods, enforcement of contract and property rights, regulatory institutions, stable financial markets, and social insurance. While many companies have been accused of tax avoidance, the technology industry appears to be particularly exposed to tax issues owing to its rapid accumulation of cash, complex group structures, and the opacity over where companies are registering profits. This will be particularly important against a background of rising austerity and public welfare cuts (as we are likely to see when government seeks to take control over post-COVID budget deficits).
What are we doing to address these risks?
When analysing stocks for our buylist, we carry out detailed ESG analysis to assess a company’s impact on specific E, S and G factors, which results in an overall ESG rating. Only stocks that meet our threshold make it onto our buylist. Once we invest in a company, we engage with it on our investors’ behalf, by exercising our voting rights and driving policy outreach. We assess our holdings against this list of potential ESG issues. Where we can have an impact through our engagement and policy outreach, we act.
One of our priorities for 2021 is setting a vision for a responsible technology sector. Scrutiny is beginning to translate into action, whether over anti-competitive behaviour, questionable tax structures, inadequate content management or privacy controls. An unresponsive tech sector will raise risks to capital. Investors have been relatively silent on these trends; this needs to change.
It has been prepared solely for information purposes and is not a solicitation, or an off er to buy or sell any security. The information on which the document is based has been obtained from sources that we believe to be reliable, and in good faith, but we have not independently verifi ed such information and no representation or warranty, express or implied, is made as to their accuracy. All expressions of opinion are subject to change without notice.
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The value of the investments of the funds and the income from them can fall as well as rise and investors may not get back the amount originally invested.
Please note that these are the views of Josh Sambrook-Smith and Kwai San Wong of Sarasin and should not be interpreted as the views of FPIL.